Saudi cooperatives account for approximately 51% of the global contributions and Malaysia has emerged as the world’s largest family takaful market

Singapore, 22 October 2013 – According to EY’s latest report, Global Takaful Insights 2013: Finding growth markets, key markets continue to offer growth prospects with low market penetration rates, but wider opportunities beckon in emerging markets. The global takaful industry grew 16% in 2012, a noticeable moderation from a 22% CAGR over 2007-2011. Takaful in most markets is still in its infancy, and its potential to replace conventional insurance in leading Islamic finance markets is still largely untapped.

The report also finds that in order for the industry to maintain its growth trajectory, larger regional players who can provide leadership for building capacity in the industry will need to develop, and there is a need to address a number of business risks that the industry executives cite as challenges to the industry as a whole. Presently, Saudi Arabia, the United Arab Emirates (UAE) and Malaysia lead the industry with their relatively well-developed Islamic finance industries, including Sukuk markets, strong customer reach and competitive pricing. The role of authorities in simplifying regulatory frameworks across borders and encouraging consolidation will also be key in propelling the industry’s expansion.

Ashar Nazim, Global Islamic Finance Leader at EY comments: “Takaful operators must adopt a clear strategy and capital plan that includes both organic and inorganic growth, and maintain and refine segmentation or exit and acquisition strategies, which can mitigate potential risks.”

Varying markets, varying potential

As industry leaders look beyond their borders, a key take-away is that growth and profitability vary significantly by markets and sectors, depending on each market’s maturity, industry and regulatory structure. While it is common to focus on populous Muslim markets, operators should not lose sight of other markets across Europe, Africa and the Asia-Pacific.

“Adopting a multi-market approach not only helps manage risk diversification but also offers profitable opportunities in niche segments. Investing in rapid growth markets, which are often made up of young, growing populations, can lead to achieving critical mass very quickly. However, detailed market analysis and planning are required to ensure strategic success,” explains Abid Shakeel, Senior Director of EY’s Global Islamic Banking Centre.

Growth does not equal profitability

While Saudi Arabia, the UAE and Malaysia hold the lion’s share of the takaful market, the acquisition of market share has not necessarily translated into profitability in many instances. Financial performance and managing key strategic issues remain challenging for takaful operators in many markets.

According to the report, there are three areas of development that need to be addressed in response to the issue of profitability. These include:

Efficiency in operation - most operators have yet to achieve critical business volume despite incurring substantial establishment costs over formative years.

Quality of underwritten business – access to quality customers and potentially lucrative commercial lines are limited due to under-developed broker relationships, operational history and scale.

Solvency and capital requirements – smaller players need to quickly build scale or consider mergers in order to meet these requirements.

Growth potential of rapid-growth markets

Rapid-growth markets (RGMs) are poised to become the new centers of development over the next 10 years. Infrastructure and new regulatory enhancements are presenting opportunities across all markets. For the takaful industry, the large populations of countries such as Indonesia and Turkey offer untapped potential demand.

Investors looking to establish new takaful operations in RGMs must be prepared for the long haul and be aware that the nature of returns will not be comparable to those of conventional issuers. Investments must be made on commercial merit rather than for altruistic reasons. Learning from core Islamic finance markets is key to addressing the rising demand in these countries expeditiously.

Malaysia makes headway in family takaful

Malaysia has emerged as the world’s largest family takaful market, securing close to three quarters of its domestic market share. Its proven operating models, young Muslim population and regulatory initiatives such as the Takaful Operating Framework 2012, the Islamic Financial Services Act 2013, and the Risk-based Capital for Takaful (RBCT) have enhanced operational efficiency, ensured healthy and sustainable funding, and promoted uniformity across business practices for operators.

“The maturity of established regulations across all areas of Islamic finance in Malaysia, including Sukuk issuance, has made Malaysia one of the top destinations for global institutions seeking to tap into the strong demand for long-term investments. It has also strengthened Malaysia’s position as a regional center of excellence for the takaful industry,” shares Dato’ Rauf Rashid, Country Managing Partner of EY Malaysia.

Large regional champions necessary to lead industry

Presently, there is a dearth of takaful operators who are capable of providing leadership to the growing internationalization of the industry. Few can truly make the claim to being regional, let alone global. In order for the industry to be successful, well-established regional or global players must emerge.

Any strategy to develop and grow into regional players must reflect the inception and growth of the insurance industry. Continual building of scale in commercial lines, determining which markets require physical presence versus presence in markets where local operators would not have the capacity to underwrite large risks, and the use of actuarial analysis to price such risks, are strategies operators must consider in their move towards becoming regional champions.

“For takaful operators looking to expand their regional footprint, achieving a unified approach across all markets will remain a challenge as no two markets are alike. Risk and product specialization, growth strategies and familiarity with the regulatory framework of each market they choose to penetrate are key elements that require close attention. In the medium term, traditional Muslim markets with established takaful practices will continue to provide favorable conditions. In the long term, however, operators must step out of their comfort zones and explore large rapid growth markets, of which the populous markets will provide them with the best prospects for the future,” concludes Ashar.

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About Global Takaful Insights 2013

The Global Takaful Insights 2013 aims to capture key Islamic insurance industry and regulatory developments across established and emerging markets, and provide insights on the industry’s growth and profitability, including opportunities and challenges. The report further highlights the industry’s needs as it moves towards the next phase of growth.

Observations and findings of the report were compiled from surveys of more than 20 senior executives in leading takaful markets, and desktop research collation of 116 insurers across six countries including Saudi Arabia, UAE and Malaysia.

About EY

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.